Economic Macroaggression

James Grant, the founder of the indispensable Grant’s Interest Rate Observer and one of my favorite financial writers, likes to describe macroeconomics as “politics disguised with differential calculus.” Boom! Because of course macroeconomics is the cornerstone of Keynesianism, the convenient doctrine that provides politicians with the excuse to spend as much money as they can. Supposedly it works on a “multiplier” effect, but the only thing it seems to multiply is liberal stupidity.

I missed this last week, but Grant had a magnificent smackdown in the Wall Street Journal of the proposal of Harvard’s Kenneth Rogoff to abolish the $100 bill, which is merely a prelude to the desires of liberals to force us all into purely electronic savings accounts that the federal government can then command us to spend through steeply negative interest rates:

By abolishing large-denomination bills, he said there, the government could strike a blow against sin and perfect the Federal Reserve’s control of interest rates. . .

By abolishing large-denomination bills, he said there, the government could strike a blow against sin and perfect the In a deep recession, Mr. Rogoff proposes, the Fed ought not to stop cutting rates when it comes to zero. It should plunge right ahead, to minus 1%, minus 2%, minus 3% and so forth. At one negative rate or another, the theory goes, despoiled bank depositors will stop saving and start spending. According to the worldview of the people who constitute what Mr. Rogoff fraternally calls the “policy community” (who elected them?), the spending will buttress “aggregate demand,” thus restore prosperity.

Mr. Rogoff is a true believer in the discretionary command of monetary matters by former tenured economics faculty—the Ph.D. standard, let’s call it. Never mind that, in post-crisis America, near 0% interest rates have failed to deliver the promised macroeconomic goods. Come the next crackup, Mr. Rogoff would double down—and down.

You have never met a more cocksure lot than the monetary-policy clerisy. . . It would make one more confident in such forecasts if the leading lights of the policy community had not been looking the wrong way in 2008. How did they miss the biggest event of their professional lives? The simple answer is that, though central bankers believe themselves to be independent of their governments (a debatable claim), they are hardly independent of each other or of the doctrines of John Maynard Keynes and his modern-day disciples.

That’s going to leave a mark. What a great new theory from the Keynesian geniuses, No more need for taxing and spending or even borrowing: just force the American people to spend their savings to “stimulate” the economy by what is essentially a confiscatory tax disguised as “negative interest rates.” Spend your dough or we take it from you: such a deal.

But this is merely prelude to the main event of the week, which is the appearance of a paper by New York University economist Paul Romer (husband of Christine Romer, who was Obama’s chief economic adviser for a while not the first time I’ve gotten Paul and David Romer confused, though I add I’ve liked some of David Romer’s work that I’ve occasionally seen) entitled “The Trouble with Macroeconomics.” (PDF link.) Here’s the magnificent abstract:

For more than three decades, macroeconomics has gone backwards. The treatment of identification now is no more credible than in the early 1970s but escapes challenge because it is so much more opaque. Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as “tight monetary policy can cause a recession.” Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes. A parallel with string theory from physics hints at a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.

The complete paper has lots of math in it, but its use of the renegade physicist Lee Smolin’s work is very creative. Smolin has written well about the difficulties with “string theory” that is all the rage in physics, and by extension Romer is saying it is time to pull the string on macroeconomic hubris.